Japan's little firms

Small mercies

The remedy for big problems

COMPARED with some of Junichiro Koizumi's fiery slogans, Haruo Shimada's description of desired reforms sounds disarmingly modest. The prime minister talks boldly of “reform without sanctuary”. Mr Shimada, who advises him, simply asks you to picture a Japan with “500,000 small firms, making people happier and providing services that they badly need”. Yet although Mr Shimada says this without squinting, setting his jaw or chopping a hand in the air, the Keio University economist is advocating the same drastic changes that Mr Koizumi still says he wants. For in Japan it will be hard to make people happier or provide decent services without overhauling the entire small-business sector, and much of the country's political economy along with it.

Messrs Koizumi and Shimada are hardly alone in wanting to tap the benefits of small companies. Countless Japanese pundits and officials harbour visions of eager young engineers and computer whizzes clustering together to churn out new technologies and jolt the economy to life. Bureaucrats at the trade and economy ministry want to promote closer links between university scientists and the private sector, to which they attribute much of America's success. They also talk up schemes to channel more money to small firms with promising new technologies.

Low-tech counts too

They are right to lament Japan's relative lack of small high-tech companies. But the trouble with this single-minded focus is that the rest of the country's small-business sector is also crying out for change. Solving these problems requires the sort of changes that Mr Shimada wants.

James Kondo, a McKinsey consultant in Tokyo, points out that, besides high-tech firms, two other groups of small companies need fixing. One operates in service sectors tightly controlled by the government, running child-care centres, nursing homes and so forth. These outfits enjoy lots of subsidies and little competition, and are closely connected to powerful factions in the ruling Liberal Democratic Party. The other group operates more freely in the private sector, but is just as inefficient, running outfits from food-processing plants to mom-and-pop retail stores on a scale far too small to achieve rich-country levels of productivity.

Both of these groups of small firms warrant very different treatment from that of the high-tech firms the bureaucrats adore. Far from nurturing them, a decent reform programme would take steps towards putting them out of business, either to be replaced by consumer-friendly private services (the first group) or closed down to boost scale and efficiency (the second). Mr Shimada argues that the social-care sector should be deregulated, stripped of its subsidies and opened up to competition. This will face opposition from the usual vested interests, but could transform a large sector of the economy.

Could Japan introduce such a change? Surveys have confirmed that consumers are not satisfied with existing services. Sensible reforms are likely to be popular with the voters. With Japanese women caught raising children while caring for two sets of parents, a push for better old-age and child care could win over many of them, along with the elderly. Hence Mr Shimada's interest in a swathe of independent small-scale social services, from nursery schools and nursing homes, to physical rehabilitation centres and preventative health-care services.

If pitched the right way, Mr Shimada believes, it would be easy to build widespread support for changes. If competition can be paired with spending cuts, this could also release money to smooth the transformation of the mom-and-pop sectors. And perhaps best of all, argues Mr Shimada, overhauling social services is a great way to generate jobs in an ageing society. “Sum them all together,” he says, “and they could be ten times bigger than Toyota or Sony.”